SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
( x ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended October 1, 1995
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____ TO ____
Commission File Number 1-302
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ARVIN INDUSTRIES, INC.
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(Exact name of Registrant as specified in its charter)
Indiana 35-0550190
- ------------------------------- ------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
One Noblitt Plaza, Box 3000
Columbus, IN 47202-3000
- ---------------------------------------- --------------
(Address of principal executive offices) (Zip Code)
(812) 379-3000
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Registrant's telephone number, including area code:
Indicate by check mark whether the Registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
and Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to
file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
Yes X NO
--- ---
As of November 5, 1995, the Registrant had outstanding 22,300,607 Common
Shares (excluding treasury shares), $2.50 par value.
Table of Contents
Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations for the Three Months and
Nine Months Ended October 1, 1995 and October 2, 1994
Consolidated Statement of Financial Condition at October 1, 1995
and January 1, 1995
Consolidated Statement of Cash Flows for the Nine Months Ended
October 1, 1995 and October 2, 1994
Condensed Notes to Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Part II. Other Information
Item 6. Exhibits and Reports on Form 8K
<PAGE>
Part I
Item 1. Financial Statements
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Operations (Unaudited)
(Dollars in millions, except per share amounts)
<CAPTION>
Three Months Ended Nine Months Ended
---------------------------- -----------------------------
October 1, October 2, October 1, October 2,
1995 1994 (1) 1995 1994 (1)
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Net Sales $ 462.1 $ 452.7 $ 1,465.9 $ 1,367.9
Costs and Expenses:
Cost of goods sold 403.9 385.8 1,277.0 1,161.0
Selling, operating general and administrative 38.0 36.6 114.6 112.2
Corporate general and administrative 2.7 3.2 7.9 9.2
Interest expense 10.1 10.8 32.2 31.1
Interest income (.2) (.2) (.7) (1.1)
Other expense, net 3.0 1.4 6.9 6.3
Restructuring charges (.7) -- 2.9 --
Special charges and credits, net .1 -- 7.0 --
---------- ---------- ---------- ----------
456.9 437.6 1,447.8 1,318.7
---------- ---------- ---------- ----------
Earnings from Continuing
Operations Before Income Taxes 5.2 15.1 18.1 49.2
Income taxes (2.0) (5.8) (6.9) (19.5)
Minority share of income (.3) (.5) (1.6) (1.4)
Equity income (loss) of affiliates (.2) 1.1 .9 1.5
---------- ---------- ---------- ----------
Earnings from Continuing Operations 2.7 9.9 10.5 29.8
---------- ---------- ---------- ----------
Income (loss) from discontinued operations,
net of income tax (benefit) of ($.7), ($.1), $.5
and ($.2), respectively (1.7) (.1) .4 (.7)
Income from disposal of discontinued operations,
net of income taxes of $.0, $.0, $.2 and $.0,
respectively -- -- .7 --
---------- ---------- ---------- ----------
Net Earnings $ 1.0 $ 9.8 $ 11.6 $ 29.1
========== ========== ========== ==========
Earnings Per Common Share
Primary:
Continuing Operations $ .12 $ .45 $ .47 $ 1.33
Discontinued Operations (.08) (.01) .05 (.03)
---------- ---------- ---------- ----------
Total - primary $ .04 $ .44 $ .52 $ 1.30
========== ========== ========== ==========
Fully Diluted:
Continuing Operations $ .12 $ .43 $ .47 $ 1.29
Discontinued Operations (.08) (.01) .05 (.03)
---------- ---------- ---------- ----------
Total - fully diluted $ .04 $ .42 $ .52 $ 1.26
========== ========== ========== ==========
Average Common Shares Outstanding (000's)
Primary 22,386 22,334 22,374 22,401
Fully Diluted 25,090 25,729 25,242 25,813
Dividends Per Common Share $ 0.19 $ 0.19 $ 0.57 $ 0.57
(1) Certain amounts have been reclassified to conform with current year presentation.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Financial Condition (Unaudited)
(Dollars in millions, except per share amounts)
<CAPTION>
As of As of
10/01/95 1/1/1995(1)
-------- --------
<S> <C> <C>
Assets
------
Current Assets:
Cash and cash equivalents $ 56.2 $ 11.1
Receivables, net of allowances of $3.3 as of
October 1, 1995 and $3.8 as of January 1, 1995 285.5 262.8
Inventories 110.7 102.1
Other current assets 94.7 76.3
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Total current assets 547.1 452.3
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Non-Current Assets:
Property, plant and equipment:
Land, buildings, machinery & equipment 912.4 857.6
Less: Allowance for depreciation 479.6 439.5
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432.8 418.1
Goodwill, net of amortization of $28.7 as of
October 1, 1995 and $26.6 as of January 1, 1995 147.1 150.4
Investment in affiliates 90.2 92.0
Assets of business transferred under contractual arrangements 72.4 --
Net assets of discontinued operations -- 68.3
Other assets 51.4 50.4
-------- --------
Total non-current assets 793.9 779.2
-------- --------
$ 1,341.0 $ 1,231.5
======== ========
Liabilities and Shareholders' Equity
------------------------------------
Current Liabilities:
Short-term debt $ 136.5 $ 25.1
Accounts payable 201.0 193.4
Accrued expenses 105.4 99.9
Income taxes payable 2.4 2.9
-------- --------
Total current liabilities 445.3 321.3
-------- --------
Long-term employee benefits 53.1 50.3
Other long-term liabilities 17.4 15.0
Long-term debt 324.3 416.3
Liabilities and deferred credit of business transferred 72.4 --
Minority interest 33.2 32.3
Shareholders' Equity:
Common shares ($2.50 par value) 60.5 60.4
Capital in excess of par value 207.3 206.6
Retained earnings 193.0 194.1
Minimum pension liability adjustment (.6) (.6)
Cumulative translation adjustment (21.5) (20.7)
Common shares held in treasury (at cost) (43.4) (43.5)
-------- --------
Total shareholders' equity 395.3 396.3
-------- --------
$ 1,341.0 $ 1,231.5
======== ========
(1) Certain amounts have been reclassified to conform with current year presentation.
See notes to consolidated financial statements.
</TABLE>
<PAGE>
<TABLE>
Arvin Industries, Inc.
Consolidated Statement of Cash Flows (Unaudited)
(Dollars in millions)
Nine Months Ended
---------------------------------
October 1, October 2,
1995 1994 (1)
---------- ----------
<S> <C> <C>
Operating Activities:
Net earnings $ 11.6 $ 29.1
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation 52.6 53.6
Amortization 4.3 5.4
Long-term employee benefits (0.6) 2.7
Deferred income taxes, long-term 1.1 (2.0)
Minority interest 2.1 1.4
Other (5.4) 1.0
Changes in operating assets and liabilities:
Receivables (11.1) (79.7)
Inventories and other current assets (33.2) (24.2)
Accounts payable and other accrued expenses 9.4 54.2
Income taxes payable and deferred taxes (0.6) 9.6
---------- ----------
Net Cash Provided by Operating Activities 30.2 51.1
---------- ----------
Investing Activities:
Purchase of property, plant and equipment (62.8) (68.3)
Proceeds from sale of property, plant and equipment 1.2 0.8
Acquisition, net of cash -- (7.5)
Cash proceeds from sale of businesses 66.8 --
Other (7.8) 12.6
---------- ----------
Net Cash Used For Investing Activities (2.6) (62.4)
---------- ----------
Financing Activities:
Change in short-term debt, net 38.7 22.6
Proceeds from long-term borrowings 1.5 86.0
Principal payments on long-term debt (22.8) (87.1)
Dividends paid (12.7) (12.6)
Other 1.3 1.4
---------- ----------
Net Cash Provided by Financing Activities 6.0 10.3
---------- ----------
Cash and Cash Equivalents:
Effect of exchange rate changes on cash 0.2 0.3
---------- ----------
Net increase (decrease) 33.8 (0.7)
Beginning of the period 22.4 39.1
---------- ----------
End of the Period $ 56.2 $ 38.4
========== ==========
(1) Certain amounts have been reclassified to conform with current year presentation.
See notes to consolidated financial statements.
</TABLE>
ARVIN INDUSTRIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting principles
for interim financial information and with the instructions to Form 10-Q
and Rule 10-01 of Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting
principles for complete financial statements and should be read in
conjunction with the financial statements and notes thereto appearing in
the Company's annual report on Form 10-K for the year ended January 1,
1995.
The Company's unaudited financial statements, including those for the nine
months ended October 1, 1995, reflect, as an unconsolidated subsidiary, the
results of a 50 percent owned subsidiary which had been previously
consolidated by the Company for the period beginning January 2, 1995.
In the opinion of management, all adjustments considered necessary for a
fair presentation of the results of operations, cash flows and financial
position for the periods and as of the dates reported have been included.
Other than the adjustments described in Notes 2, 7 and 10, all such
adjustments are of a normal and recurring nature.
The results of operations for the nine months ended October 1, 1995 are not
necessarily indicative of the results to be expected for the full year
ending December 31, 1995.
Note 2. Results of operations for the first nine months of 1995 include
$2.1 million of restructuring charges for net early retirement and
severance program costs, other restructuring costs of $1.3 million and
restructuring income of $.4 million as a result of the reversal of accrued
expenses no longer anticipated for completion of restructuring projects.
The year to date restructuring costs were anticipated and disclosed as a
part of the 1994 restructuring, but they were not permissible for 1994
accrual under prevailing accounting guidelines. Cash expenditures for the
first nine months include $2.5 million for restructuring costs which were
accrued in 1994 and $1.4 million of other restructuring costs accrued and
paid during the first nine months of 1995. The remaining workforce
reductions and consolidation of manufacturing facilities and product lines
announced as a part of the 1994 restructuring will be substantially
complete by December 31, 1995. A total of 296 employees were separated
from employment in the Company's continuing operations through the end of
the third quarter as a part of the 1994 restructuring plan. The total
number of employees in the Company's continuing operations to be separated
under the 1994 restructuring plan is estimated to be 310.
Note 3. On September 29, 1995, the Company completed the sale of its 70
percent ownership interest in Space Industries International, Inc.
("SIII") to a new company formed by the senior management of SIII
for approximately $30.6 million in cash. The Company has
guaranteed approximately $22.9 million of the purchaser's (Calspan SRL
Corporation) debt. This guarantee is scheduled to decline quarterly over a
four year period before expiring. Proceeds from the sale will be used for
debt reduction and new investment in the Company's core business.
The Company has accounted for the SIII transaction following the treatment
set forth in the Securities and Exchange Commission's Staff Accounting
Bulletins - Topic 5E (SAB Topic 5E) "Accounting for divestiture of a
subsidiary or other business operation." Accordingly, the assets of SIII
at the sale date have been recorded under the caption "Assets of business
transferred under contractual arrangements" with a corresponding amount
recorded as "Liabilities and deferred credit of business transferred." A
$1.6 million gain on sale of SIII has been separately deferred.
The results of operations of SIII have been previously reported by the
Company as the Technology segment. In the current quarter, the results of
SIII for the current and prior year periods have been reclassified to
"Income (loss) from discontinued operations." Similarly, the prior
year statement of financial condition has been restated to present SIII's
assets and liabilities as "Net assets of discontinued operations."
SIII's revenues for the first nine months of 1995 and 1994 were $95.5
million and $156.2 million, respectively.
The Company adopted a plan to sell its Schrader Automotive unit (Schrader)
during April, 1994. The results of Schrader were reclassified to
discontinued operations beginning with the first quarter 1994 Form 10Q
filing. The sale of Schrader was completed in February, 1995. An initial
payment for the estimated selling price of $43.0 million, consisting of
$36.2 million in cash and $6.8 million in preferred stock and warrants, was
received and the estimated gain recorded in the first quarter 1995 was $.7
million, net of tax. Schrader's 1995 revenues through the February 16,
1995 sale date were $13.1 million.
Note 4. There were options for 2.0 and 1.9 million common shares
outstanding as of October 1, 1995 and October 2, 1994, respectively.
Earnings per share calculations include dilutive options in the
determination of the weighted average common and common equivalent shares
outstanding. Interest paid, net of tax, on the 7.5 percent convertible
subordinated debentures is added to net earnings in calculating fully
diluted earnings per share.
Note 5. The Company uses the method of pooling, by individual natural
inventory components (e.g., steel, substrate, labor and overhead), in
computing an overall weighted average index. The index is applied to the
total dollar value of the ending inventory. This method of pooling makes
it impractical to classify LIFO inventories into finished goods, work in
process and raw material components.
Note 6. The Company repurchased, at approximately book value, $7.8 million
of its outstanding 7.5 percent convertible subordinated debentures during
the first quarter 1995, $2.0 million during the second quarter 1995, and
$6.9 during the third quarter 1995. Subsequent to the end of the third
quarter 1995, the Company has purchased an additional $5.1 million of the
7.5 percent convertible subordinated debentures. The remaining 7.5 percent
convertible subordinated debentures, due in 2014, are convertible into
common shares at a rate of approximately 35.09 shares for each $1,000
debenture held.
Note 7. During the second quarter of 1995, a judgment for $8.0 million was
entered for breach of contract against Maremont Corporation, an Arvin
subsidiary, in favor of Chamberlain Manufacturing Corporation. The
previously disclosed case grew out of the May 1987 sale of a Maremont unit,
Saco Defense, Inc., to Chamberlain and relates to certain worker
compensation cases which were pending at the time of the sale. Chamberlain
has petitioned the court for pre-judgment interest and for attorney fees,
costs and expenses. These petitions are being contested and have not been
ruled upon. As a result of the judgment and potential additional costs
related to that judgment, the Company added $6.9 million in the second
quarter to previously established litigation reserves. The Company has
filed a motion to set aside the judgment and a motion to vacate judgment
and dismiss for lack of jurisdiction and, if necessary, intends to appeal
the judgment.
Another previously disclosed suit, filed by Chamberlain, is based on
assertions that at the May 1987 stock sale there were known non-conforming
products manufactured by Saco under contracts with the United States
government. Formal discovery has been completed in the non-conforming
product lawsuit. No trial date has been set.
The Company is a participant with the EPA and the current owner of a site
previously owned by the Company's Maremont subsidiary in a corrective
action proceeding under the Resource Conservation and Environmental
Recovery Act. In the fourth quarter of 1994, based on the results of an
environmental study, the Company accrued for its share of the reasonably
estimable minimum remediation costs at this site, which include costs
incurred in connection with further studies and design of a remediation
plan, remedial costs, including cleanup activities, and administrative,
legal and consulting fees.
The Company is defending various environmental claims and legal actions
that arise in the normal course of its business, including matters in which
the Company has been designated a potentially responsible party at certain
waste disposal sites or has been notified that it may be a potentially
responsible party at other sites as to which no proceedings have been
initiated. At a majority of these sites, the information currently
available leads the Company to believe it has very limited or even de
minimis responsibility. At other sites, the remediation method, amount of
remediation costs, or the allocation among potentially responsible parties
have not been determined. Where reasonable estimates are possible, the
Company has provided for the costs of study, cleanup, remediation, and
certain other costs, taking into account, as applicable, available
information regarding site conditions, potential cleanup methods and the
extent to which other parties can be expected to bear those costs. Given
the inherent uncertainties in evaluating legal and environmental exposures,
actual costs to be incurred in future periods may vary from the currently
recorded estimates. During the third quarter of 1995, based upon a revised
assessment by legal counsel of pending legal matters, the Company added
$3.0 million to its litigation reserves. These charges were largely offset
in the quarter by a settlement with a party potentially liable for certain
costs in connection with various environmental matters. These items were
recorded as "Special charges and credits, net." For the nine months
ended October 1, 1995, "Special Charges and Credits, net" also includes
the $6.9 million second quarter addition to legal reserves described above.
The Company expects that any sum it may be required to pay in connection
with legal and environmental matters in excess of the amounts recorded will
not have a material adverse effect on its financial condition.
Note 8. Arvin's Board of Directors has approved a one million share Common
Share Repurchase Program. The objective of the program is to meet benefit
plan obligations, including employee stock options. Through November 5,
1995, the Company had repurchased 74,173 shares. Additional repurchases
under the program may take place from time to time in the market.
Note 9. Changes in Shareholders' Equity
(Dollars in millions)
For the Nine Months Ended
-------------------------
10/1/95 10/2/94
------- -------
Beginning balance $ 396.3 $ 420.6
Exercise of stock options 1.0 1.5
Purchase of treasury stock (1.1) --
Cash dividends declared (12.7) (12.6)
Net earnings 11.6 29.1
Translation adjustments during the period (.8) 9.3
Shares contributed to employee benefit plan 1.0 1.4
------- -------
Total shareholders' equity $ 395.3 $ 449.3
======= =======
Note 10. During the first quarter of 1995, a one time special credit of
$3.9 million was recorded in the Technology segment to reduce prior years'
accruals for retiree medical benefits. In the third quarter of 1995, the
Technology segment recognized a one time charge approximating $1.6 million
for the settlement of certain pension benefits. These items have been
reclassified and are included in "Income (Loss) from Discontinued
Operations."
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Financial Review
(Dollar amounts in tables in millions)
Overview
At the end of the third quarter of 1995, Arvin completed the sale of its 70
percent ownership interest in Space Industries International, Inc. (Space
Industries). Previously, Space Industries had been reported by Arvin as
the Technology Segment. The current year and prior year comparative
financial statements have been restated to reflect the results of the
Technology Segment as discontinued operations. There was no gain or loss
reported on the sale of the Technology Segment. "Income from Discontinued
Operations" also includes income from the Company's Schrader operations
through the first quarter of 1994. The Company's Schrader operations were
reported as discontinued in the first quarter of 1994 and the sale was
completed in February, 1995. The estimated first quarter 1995 gain on the
sale of Schrader is reported as "Income from Disposal of Discontinued
Operations."
The Company's sales from continuing operations for the nine months ended
October 1, 1995 increased 7 percent, to $1,465.9 million from $1,367.9
million for the nine months ended October 2, 1994. The Company recorded
sales of $462.1 million for the third quarter 1995, which represents a 2
percent increase over the third quarter 1994 sales of $452.7 million.
Earnings from continuing operations decreased to $10.5 million for the nine
months ended October 1, 1995 from $29.8 million for the nine months ended
October 2, 1994. Earnings from continuing operations decreased to $2.7
million in the third quarter 1995 from $9.9 million in the third quarter
1994. Earnings from continuing operations for the first nine months of
1995 include a second quarter non-recurring charge of $6.9 million ($4.2
million net of tax) related to an 8 million dollar judgment against an
Arvin subsidiary for breach of contract in connection with a 1987
divestiture.
Currency fluctuations had a positive impact on the comparative balances of
sales and operating profit for both the quarter and year to date periods.
After eliminating the effects of the weaker dollar on the translation of
local currency sales, sales increased 1 percent for the quarter and 5
percent for the nine month period. Operating income fell 38 percent and 31
percent for the quarter and nine months, respectively, on a constant
exchange rate basis.
Results of Operations
1995 1994 1995 1994
Third Third First Nine First Nine
Net Sales by Segment Quarter Quarter Months Months
- -------------------- ------- ------- ---------- ----------
Automotive Original Equipment $296.0 $278.1 $ 979.4 $ 873.1
Automotive Replacement 166.1 174.6 486.5 494.8
------ ------ -------- --------
Total $462.1 $452.7 $1,465.9 $1,367.9
====== ====== ======== ========
1995 1994 1995 1994
Third Third First Nine First Nine
Operating Income by Segment Quarter Quarter Months Months
- --------------------------- ------- ------- ---------- ----------
Automotive Original Equipment $ 9.8 $ 15.9 $ 44.3 $ 51.0
Automotive Replacement 10.1 14.3 25.5 43.2
------ ------ -------- --------
Total $ 19.9 $ 30.2 $ 69.8 $ 94.2
====== ====== ======== ========
(1) Reflects income from continuing operations prior to Corporate allocated
expenses.
Automotive Original Equipment ("OE"): Sales in the OE segment of $979.4
million for the nine months ended October 1, 1995 were 12 percent higher
than OE sales for the same period in 1994. The effect of price changes on
sales was negligible, accounting for less than 3 percent of the total
increase. Units sold increased in almost every major market served. The
volume effect of increased sales of exhaust systems approximated $75
million, while Ride Control's unit volume increase approximated $25
million. Although the Company experienced increased volumes in its sales
results, the Company estimates that the industry wide market volumes in
its major markets for OE parts declined. North American vehicle production
fell less than 1 percent. The Company's sales volume in Mexico declined an
estimated $13 million as a result of general economic conditions in that
country. Coated steel volume posted a modest 2 percent increase, while
changing volumes in other component automotive parts posted modest
decreases.
Comparison of the effect of changes in volume from period to period is
subject to a number of limitations, principally centered around what
constitutes a "unit" for volume measurement. The appropriate measure of
a "unit" varies over time as products develop, varies among the different
countries in which the Company operates, and varies within each operating
unit of the Company. As a result, there is a certain degree of imprecision
and subjectivity in estimating the impact of volume changes.
Third quarter OE sales of $296.0 million were 6 percent higher than sales
of $278.1 million in the comparable quarter of 1994. Net changes in prices
accounted for approximately 18 percent of the total increase. The Company
experienced slight decreases in North American sales volumes and moderate
increases in sales volumes throughout Europe. The total volume effect on
sales increases is estimated at 75 percent of the total $17.9 million
increase. The Company's volume increased despite an estimated 3 percent
decline in the North American vehicle production and a slight decline in
the European market.
Operating profit of $44.3 in the OE segment for the first nine months of
1995 declined by $6.7 million, or 13 percent, when compared with the first
nine months of 1994. The decline was primarily a result of increased
material and labor costs of approximately $19 million. These declines were
largely offset by the positive effect on sales revenues of the changes in
volume and price.
Operating profit in the OE segment decreased $6.1 million or 38 percent
during the third quarter of 1995, when compared to the third quarter of
1994. The third quarter decrease is primarily a result of increased
material costs for exhaust production of $5.2 million.
Automotive Replacement ("Replacement"): Sales in the
Replacement segment of $486.5 million for the nine months
ended October 1, 1995 were 2 percent lower than Replacement
sales for the same period in 1994, despite the overall 2
percent positive effect on sales of price increases. Volume
fell at an overall rate of 1 percent. The volume decline
was most pronounced in the North American exhaust
aftermarket, where the Company's 12 percent decline in
volume approximated the estimated overall North American
market decrease. All North American markets reported volume
declines. The European replacement exhaust market also
reported a slight decline in volume. Sales to developing
countries continued to post strong increases.
Operating units in the Replacement segment sell their product through a
variety of different customer "channels" including merchandisers,
installers, and wholesale distributors. As a result of period to period
variations in this "channel mix," in addition to normal variations in
"product mix," the average price of units sold may not correspond to
price changes. As in the OE Segment, there is also a certain degree of
imprecision and subjectivity in estimating the impact of period to period
volume changes, principally because of questions as to what constitutes a
"unit" for volume measurement. The appropriate measure of a "unit"
varies over time as products develop, varies among the different countries
in which the Company operates, and varies within each operating unit of the
Company.
For the third quarter, Replacement sales of $166.1 million were 5 percent
lower than sales of $174.6 million in the comparable quarter of 1994,
despite the approximately 2 percent positive effect of price changes.
Sales volumes posted a 2 percent decline, with the North American markets
again accounting for much of the overall decline. An unfavorable channel
and product mix accounted for the remainder of the decrease.
Operating profit in the Replacement segment decreased $17.7 million during
the first nine months of 1995, when compared to the first nine months of
1994. Labor and material cost inflation in excess of cost reductions
amounted to approximately $6.6 million. Volume declines accounted for an
estimated $2.2 million of the decrease and the costs of acquiring new
customers accounted for approximately $2.6 million of the decrease. Despite
price increases, the average price of a "unit" sold was relatively
unchanged as a result of unfavorable channel and product mix. For the
quarter, operating profit decreased $4.2 million. Volume declines
accounted for an estimated $2.6 million of the decrease and the costs of
acquiring new customers accounted for approximately $1.0 million of the
decrease. Labor and material cost inflation in excess of cost reductions
amounted to approximately $2.0 million. Price increases had a positive
effect on the quarter's results.
Corporate General and Administrative expenses decreased 14 percent or $1.3
million in the first nine months of 1995 and $.5 million or 16 percent in
the third quarter. The decrease was primarily the result of reduced
expenditures for employee costs and professional services.
Interest expense increased by 4 percent or $1.1 million for the first nine
months of 1995 versus the comparable period of 1994. The increase was a
result of higher average borrowing costs on slightly lower average
outstanding debt. For the quarter, interest expense decreased 6 percent or
$.7 million on lower average borrowing costs and higher average outstanding
debt.
Restructuring Charges related to the 1994 restructuring plan of $2.9
million are included in results of operations in the first nine months of
1995. Included in these charges is $2.1 million of restructuring charges
for net early retirement and work force reductions for the first nine
months, $1.3 million of other costs and $.4 million of income from the
reversal of accrued expenses no longer anticipated for completion of
restructuring projects. The third quarter of 1995 results of operations
includes $.7 million of net restructuring income. The quarter includes a
$.9 million net credit for reserve adjustments to previous estimates of
liability for work force reductions and $.4 million of income from the
reversal of other accrued expenses. The workforce reductions and
consolidation of manufacturing facilities and product lines will be
substantially complete by December 31, 1995 and are an effort to
concentrate resources allowing the Company to achieve its long-term
strategic growth objectives. The Company expects total net 1995
restructuring expenses for workforce reduction and relocation to
approximate $ 2.7 million for its continuing operations. Restructuring
costs for 1995 facility consolidations are expected to approximate $1.8
million.
Equity income (loss) of affiliates decreased $ .6 million for the nine
months and $1.3 million for the third quarter. Equity income of affiliates
for the three and nine months ended October 1, 1995 was adversely affected
by $1.2 and $2.6 million, respectively, as a result of losses from a 50
percent owned equity subsidiary serving the European Original Equipment
market. As a result of a review of the performance of this entity, the
Company has recommended to its joint venture partners that additional
capital contributions to the business are warranted. In conformity with
the joint venture agreement, discussions are continuing with the partners
on alternative methods of making such additions to the capital structure.
These discussions encompass, but are not limited to, renegotiation of
ownership percentages, including those that would result from the purchase
by the Company of some or all of the joint venture partners' shares or the
sale of some or all of the Company's shares to its partners. The Company's
investment in this affiliate at October 1, 1995 was $14.4 million. No
decisions on these alternatives have been made nor have revisions to the
joint venture agreement been completed at this date.
Income (Loss) from Discontinued Operations for both the nine and three
month periods in 1995 are the results of Space Industries International,
Inc. ($.4 million year to date income and $1.7 million loss for the third
quarter). The third quarter results for 1995 include a one time charge
approximating $1.6 million for the settlement of certain pension benefits,
a $.4 million charge for environmental reserves, and approximately $.3
million related to severance reserves. The 1994 year to date loss of $.7
million includes $.2 million income from Schrader and the $.1 million loss
for the third quarter represents losses of SIII.
Income from Disposal of Discontinued Operations of $.7 million represents
the estimated gain on the sale of Schrader, which was completed on February
16, 1995. There was no gain or loss recorded on the disposition of SIII.
Financial Condition
Liquidity: During the first nine months of 1995, working capital decreased
$29.1 million or 22 percent. The primary reason for the decrease is the
reclassification to current portion of long term debt of $50.0 million of
the Company's 9.97 percent notes maturing in the first quarter of 1996 and
$15.0 million of the Company's medium-term notes maturing in the third
quarter of 1996. After the end of the third quarter, the Company issued
$50.0 million of 7.94 percent notes in a private placement. This new debt
will replace the $50.0 million of 9.97 percent debt due in January, 1996.
See the Consolidated Statement of Cash Flows for a more detailed analysis
of changes in cash. The current ratio decreased from 1.4 at the end of
1994 to 1.2 at October 1, 1995.
Accounts Receivable and Accounts Payable both increased (9 percent and 4
percent, respectively). The primary reason for the accounts receivable
increase is longer payment terms granted to customers in the replacement
ride control products market. Days sales outstanding at the end of the
third quarter was 57.0 days compared to 50.5 days at the end of 1994.
Other Current Assets increased $18.4 million, due principally to increased
customer tooling balances.
Assets of business transferred under contractual arrangements and
Liabilities and deferred credit of business transferred represent 100
percent of the assets of the Company's former subsidiary, Space Industries
(SIII), which was sold to a new company formed by the senior management of
Space Industries for approximately $30.6 million in cash. Under the merger
agreement, the Company agreed to guarantee a portion of the new company's
debt incurred as a part of the merger. The guarantee amounted to $22.9
million at closing and is scheduled to decline on a quarterly basis over
four years before expiring. The accounting for the SIII transaction
follows the treatment set forth in the Securities and Exchange Commission's
Staff Accounting Bulletins - Topic 5E (SAB Topic 5E) "Accounting for
divestiture of a subsidiary or other business operation."
Capital Resources: Based on the Company's projected cash flow from
operations and existing credit facility arrangements, management believes
that sufficient liquidity is available to meet anticipated capital and
dividend requirements over the foreseeable future as well as the cash
outlays resulting from the 1994 restructuring program. Planned capital
expenditures for 1995 are adequate for normal growth and replacement and
are consistent with projections for future sales and earnings. Near-term
expenditures are expected to be funded from internally generated funds.
Funds generated from the February 1995 sale of Schrader and the September
1995 sale of Space Industries (See Note 3) were used to reduce the
Company's debt and for other corporate purposes.
Legal/Environmental Matters: During the second quarter of 1995, a judgment
for $8.0 million was entered for breach of contract against Maremont
Corporation, an Arvin subsidiary, in favor of Chamberlain Manufacturing
Corporation. The previously disclosed case grew out of the May 1987 sale
of a Maremont unit, Saco Defense, Inc., to Chamberlain and relates to
certain worker compensation cases which were pending at the time of the
sale. Chamberlain has petitioned the court for pre-judgment interest and
for attorney fees, costs and expenses. These petitions are being contested
and have not been ruled upon. As a result of the judgment and potential
additional costs related to that judgment, the Company added $6.9 million
in the second quarter to previously established litigation reserves. The
Company has filed a motion to set aside the judgment and a motion to vacate
judgment and dismiss for lack of jurisdiction and, if necessary, intends to
appeal the judgment.
Another previously disclosed suit, filed by Chamberlain, is based on
assertions that at the May 1987 stock sale there were known non-conforming
products manufactured by Saco under contracts with the United States
government. Formal discovery has been completed in the non-conforming
product lawsuit. No trial date has been set.
The Company is a participant with the EPA and the current owner of a site
previously owned by the Company's Maremont subsidiary in a corrective
action proceeding under the Resource Conservation and Environmental
Recovery Act. In the fourth quarter of 1994, based on the results of an
environmental study, the Company accrued for its share of the reasonably
estimable minimum remediation costs at this site, which include costs
incurred in connection with further studies and design of a remediation
plan, remedial costs, including cleanup activities, and administrative,
legal and consulting fees.
The Company is defending various environmental claims and legal actions
that arise in the normal course of its business, including matters in which
the Company has been designated a potentially responsible party at certain
waste disposal sites or has been notified that it may be a potentially
responsible party at other sites as to which no proceedings have been
initiated. At a majority of these sites, the information currently
available leads the Company to believe it has very limited or even de
minimis responsibility. At other sites, the remediation method, amount of
remediation costs, or the allocation among potentially responsible parties
have not been determined. Where reasonable estimates are possible, the
Company has provided for the costs of study, cleanup, remediation, and
certain other costs, taking into account, as applicable, available
information regarding site conditions, potential cleanup methods and the
extent to which other parties can be expected to bear those costs. Given
the inherent uncertainties in evaluating legal and environmental exposures,
actual costs to be incurred in future periods may vary from the currently
recorded estimates. During the third quarter of 1995, based upon a revised
assessment by legal counsel of pending legal matters, the Company added
$3.0 million to its litigation reserves. These charges were largely offset
in the quarter by a settlement with a party potentially liable for certain
costs in connection with various environmental matters. These items were
recorded as "Special Charges and Credits, net." For the nine months
ended October 1, 1995, "Special Charges and Credits, net" also includes
the $6.9 million second quarter addition to legal reserves described above.
The Company expects that any sum it may be required to pay in connection
with legal and environmental matters in excess of the amounts recorded will
not have a material adverse effect on its financial condition.
Other Matters: In March, 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 121 which
establishes new accounting standards for evaluating and recording
impairments of long-lived assets. The statement is effective for fiscal
years beginning after December 15, 1995 The impact of adoption of the new
statement has not been quantified.
Part II
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
- ------------
10 Guarantee Agreement
Dated as of August 14, 1995
Made by Arvin Industries. Inc. in favor of NBD Bank
Incorporated by reference to Exhibit 2(c) to the
Company's Current Report on Form 8K/A, filed November 15, 1995
11 Computation of Earnings Per Share
filed herewith as Exhibit 11
27 Financial Data Schedule
filed herewith as Exhibit 27
b. Reports Filed on Form 8-K
- -----------------------------
Report Dated - August 23, 1995, filed August 24, 1995
Item 5 Reported
On August 23, 1995, Space Industries, an approximately seventy percent
owned subsidiary of Arvin Industries, Inc., announced that it had entered
into an agreement and plan of merger with new companies formed by their
senior management.
Report Dated - September 29, 1995, filed October 4, 1995
Items 5 and 7 Reported
On September 29, 1995, Arvin Industries, Inc. sold its seventy percent
ownership in Space Industries to a group formed by Space Industries' senior
management. Upon completion of the sale, the new company changed its name
to Calspan SRL Corporation.
8K/A Report Dated - September 29, 1995, filed November 15, 1995
Items 2 and 7 Reported
Arvin Industries, Inc. repeated disclosure of the sale of its seventy
percent ownership in Space Industries and filed pro forma financial
statements and certain exhibits.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused the report to be
signed on its behalf by the undersigned, thereunto duly authorized.
Arvin Industries, Inc.
by: /s/ Richard A. Smith
______________________________
Richard A. Smith
Vice President-Finance & Chief
Financial Officer
by: /s/ William. M. Lowe, Jr.
__________________________________
William M. Lowe, Jr.
Controller & Chief Accounting Officer
Date: November 15, 1995
Exhibit 11
<TABLE>
<CAPTION>
Arvin Industries, Inc.
Computation of Earnings Per Share of Common Stock
(Amounts in millions, except per share amounts)
Unaudited Unaudited
---------------------- ---------------------
Three Months Ended Nine Months Ended
---------------------- ---------------------
October 1, October 2, October 1, October 2,
1995 1994 1995 1994
--------- --------- --------- ---------
<S> <C> <C> <C> <C>
Primary Earnings Per Share
Income from continuing operations $ 2.7 $ 9.9 $ 10.5 $ 29.8
Income from discontinued operation, net of tax (1.7) (0.1) 1.1 (0.7)
--------- --------- --------- ---------
Net income to common stock $ 1.0 $ 9.8 $ 11.6 $ 29.1
========= ========= ========= =========
Average shares of common stock outstanding 22.3 22.2 22.3 22.2
Incremental common shares applicable to common
stock options based on the common stock daily
average market price during the period 0.1 0.1 0.1 0.2
--------- --------- --------- ---------
Average common shares, as adjusted 22.4 22.3 22.4 22.4
========= ========= ========= =========
Earnings per average share of common stock
(including common stock equivalents):
Continuing operations $ 0.12 $ 0.45 $ 0.47 $ 1.33
Discontinued operations (0.08) (0.01) 0.05 (0.03)
--------- --------- --------- ---------
$ 0.04 $ 0.44 $ 0.52 $ 1.30
========= ========= ========= =========
Fully Diluted Earnings Per Share: (1)
Income from continuing operations $ 2.7 $ 9.9 $ 10.5 $ 29.8
Income from discontinued operation, net of tax (1.7) (0.1) 1.1 (0.7)
--------- --------- --------- ---------
Net income 1.0 9.8 11.6 29.1
Add back 7.5% convertible debentures' after tax
interest expense. 0.9 1.1 2.8 3.4
--------- --------- --------- ---------
Net income to common stock assuming full dilution $ 1.9 $ 10.9 $ 14.4 $ 32.5
========= ========= ========= =========
Average shares of common stock outstanding 22.3 22.2 22.3 22.2
Incremental common shares applicable to common stock
options based on the more dilutive ending or average
market price of the common stock during the period 0.1 0.1 0.1 0.2
Average common shares issuable assuming conversion
of 7.5% convertible subordinated debentures 2.7 3.4 2.8 3.4
--------- --------- --------- ---------
Average common shares assuming full dilution 25.1 25.7 25.2 25.8
========= ========= ========= =========
Fully diluted earnings per average share assuming
conversion of all applicable securities:
Continuing operations $ 0.14 $ 0.43 $ 0.53 $ 1.29
Discontinued operations (0.07) (0.01) 0.04 (0.03)
--------- --------- --------- ---------
$ 0.07 $ 0.42 $ 0.57 $ 1.26
========== ========= ========= =========
1) Fully diluted earnings per share amounts are shown for the third quarter and nine months of 1995 in accordance
with Securities and Exchange Commission requirements although not in accordance with A.P.B. 15 because they
result in anti-dilution.
See notes to consolidated financial statements.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
The schedule contains summary financial information extracted
from Form 10-Q for the period ended October 1, 1995 and is
qualified in its entirety by reference to such financial
statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<FISCAL-YEAR-END> Dec-31-1995
<PERIOD-START> Jan-02-1995
<PERIOD-END> Oct-1-1995
<PERIOD-TYPE> 9-MOS
<CASH> 56,200
<SECURITIES> 0
<RECEIVABLES> 288,800
<ALLOWANCES> (3,300)
<INVENTORY> 110,700
<CURRENT-ASSETS> 547,100
<PP&E> 912,400
<DEPRECIATION> 479,600
<TOTAL-ASSETS> 1,341,000
<CURRENT-LIABILITIES> 445,300
<BONDS> 324,300
0
0
<COMMON> 60,500
<OTHER-SE> 334,800
<TOTAL-LIABILITY-AND-EQUITY> 1,341,000
<SALES> 1,465,900
<TOTAL-REVENUES> 1,465,900
<CGS> 1,278,000
<TOTAL-COSTS> 1,392,600
<OTHER-EXPENSES> 15,800
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 32,200
<INCOME-PRETAX> 18,100
<INCOME-TAX> 6,900
<INCOME-CONTINUING> 10,500
<DISCONTINUED> 1,100
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 11,600
<EPS-PRIMARY> .52
<EPS-DILUTED> .52
</TABLE>
